Market Open Instability
The Decline of NBBO Stability at Market Open Leads to a Picture Perfect Chart
| NBBO Fluttering and Instability
One of the hallmarks of a class of destabilizing HFT algorithms is the fluttering of the
NBBO (National Best Bid or Offer). Fluttering,
is basically rapid changes in the NBBO spread (Ask price minus Bid price). Active
stocks with good liquidity will have constant NBBO spreads: for example, the NBBO
spread for SPY will maintain a 1 cent spread even during active trading. However,
if certain destabilizing HFT algorithms run in a stock, the NBBO will begin to
flutter, and within a single second, the spread may go from 1 cent to 2 cents, or
10 cents, or 20 cents or more.
You can view examples of NBBO fluttering
here or here
There are multiple causes of NBBO fluttering such as: poorly written algorithms, gaming
or confusing smart order routers,
quote stuffing other algorithms or humans, exposing
other algorithms, exposing buyer/seller interest, overwhelming the audit trail, stuffing
exchange networks to slow updates for other symbols, and other explanations.
To look at the historic growth of NBBO fluttering, we processed 650 billion quotes
over 1,516 trading days for U.S. Equities between
January 1, 2006 and January 30, 2012, and for each second, counted how many stocks
had a stable NBBO -- where the
bid/ask spread does not flutter or change
during that second. We divided the number
of stocks with stable a NBBO by the total number of stocks with quote changes during
that second to arrive at a percentage of symbols with a stable NBBO.
More on NBBO Instability.
The Decline of NBBO Stability for U.S. Equities during the first 19 seconds of every trading
day between January 1, 2006 and January 30, 2012.
The chart below shows the percentage of symbols with a stable NBBO for each of the
first 19 seconds of every trading day. Each day is color coded by age:
older dates are colored towards the violet end of the spectrum and newer dates towards
Note the very gradual deterioration of the number of stocks with a stable NBBO at
the open (left side of chart). The colors of the lines create a near perfect rainbow
as the percentage of stocks with a stable NBBO gradually falls from 90% to 35%. This
is one of the most amazing and clear images we have produced.
(click chart for higher resolution)
We welcome comments or questions at: email@example.com
Publication Date: 02/01/2012
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